Obama and the ghost of Walter Mondale

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When Barack Obama accepts the Democratic presidential nomination in Charlotte, he will no doubt channel party heroes of the past like Bill Clinton and JFK and FDR, all of whom are celebrated still for their charisma and raw political skills. But he would do well to heed the wisdom of Walter Mondale.

Yes, that’s right. Most Democrats see Mondale as a faintly embarrassing relic from an era in which Democrats had lost their way, and of course there is something to that. He was also one of the last Democrats to make the case that government was worth paying for, not just by the rich but also by the middle-income households that rely on expensive social programs.

By the summer of 1984, Mondale, the former Minnesota senator who had served as vice-president under Jimmy Carter, knew that he was facing an uphill battle for the White House. The brutal Reagan recession had given way to a V-shaped Reagan recovery, and Reagan Democrats were thick on the ground. So Mondale decided to do something very strange at that year’s Democratic National Convention. Rather than make the most anodyne, ultra-cautious, poll-tested argument he and his team could conjure up, he told the truth as he understood it. “Mr. Reagan will raise your taxes,” he told the assembled delegates. “And so will I.”

Mondale lambasted Reagan for his secret tax plan that would “sock it to average-income families” and “leave his rich friends alone,” just as critics of the Romney-Ryan ticket have alleged that the GOP’s conspicuously vague tax reform ideas would almost certainly mean shifting the tax burden downward.

Yet the really interesting part of Mondale’s tax plan that year is that it didn’t just raise taxes on America’s highest-earning households. In an era of relatively high inflation, during which “bracket creep” was a big concern for middle-income families, he called for limiting the indexing of tax brackets for roughly half of all households, a step that raised most of the revenue he hoped to generate from individual taxpayers. There were, to be sure, steeper tax increases for high-income households, but Mondale maintained that all non-poor families should chip in to tackle yawning deficits and to make the investments he believed were necessary to foster “the best-educated, best-trained generation in American history.”

That fall, of course, Mondale suffered a crushing defeat at the hands of a sunny, upbeat Ronald Reagan, who, as it turned out, really did raise taxes in his second term. Reagan’s grand ideas for containing the growth of spending – which included an ambitious swap of responsibilities between the federal and state governments and building on President Carter’s tough reforms of Social Security Disability Insurance in the middle of an economic downturn, to name only two politically explosive money-savers – had been bitterly opposed by Congress and largely abandoned by the mid-1980s. Accepting tax increases was a price Reagan was willing to pay to continue waging his war on Soviet Communism.

In 1985, coming off his huge electoral triumph, President Reagan actually campaigned for tax reform by blasting “unproductive tax loopholes that allow some of the truly wealthy to avoid paying their fair share,” as Tim Dickinson recounted in an anti-GOP jeremiad published last year in Rolling Stone. In classic fashion, the Teflon president embraced the popular part of the Mondale message and discarded the rest.

The lesson battle-hardened Democrats of that era learned was that they could never again openly call for tax increases on middle-income households. Bill Clinton, at the time the conspicuously young governor of Arkansas, took the lesson to heart when he pledged during his 1992 presidential run to cut taxes on middle-income households and to raise them on households earning over $250,000. The Clinton administration did succeed in persuading a Democratic Congress to raise the two top marginal tax rates on ordinary income as part of its 1993 budget deal. In his second term, however, President Clinton agreed to a deep cut in capital gains taxes backed by a Republican Congress in 1997, a move that helped fuel the investment boom of that era. Clinton had successfully reinvented the Democrats, GOP protestations notwithstanding, as a low-tax party.

Recognizing the success of Clinton’s tax pledge, then-candidate Barack Obama made the same promise, even using the same $250,000 threshold, despite the fact that $250,000 in 1992 would have been worth roughly $380,000 in 2008. The bigger difference between 1992 and 2008 was that the Bush-era tax cuts meant that there was far less scope for cutting the taxes paid by middle-income households.

The tax overhauls of the Clinton and Bush years had made the federal income tax highly progressive. To be sure, factoring in payroll taxes and state and local taxes makes the overall U.S. tax burden considerably less progressive. But the tax systems in most affluent democracies are actually slightly regressive, as they rely more heavily on national consumption taxes to fund universal social programs. The central virtue of these tax systems is that they undermine work incentives less than progressive tax systems that rely heavily on high marginal tax rates.

So now, as President Obama runs for a second term, he faces a serious dilemma. Despite having inveighed against the Bush-era tax cuts, he has committed himself to preserving the four-fifths of them that apply to income that falls below the all-important $250,000 threshold. At the same time, he has pledged to protect Medicare, expand Medicaid, and create a new health entitlement for young and middle-aged Americans who aren’t covered by either program, commitments that will grow more expensive as the U.S. population ages and as the voting public demands expensive new medical treatments and who knows what else.

Republicans are in a similarly tight spot. In his epic Wednesday night speech, Bill Clinton came roaring out of retirement to warn swing voters that Mitt Romney has backed extremely deep cuts to the Medicaid program. Political genius that he is, Clinton realized that while Medicare has attracted all of the attention, it is Medicaid, which covers almost 50 million beneficiaries, many of them elderly voters in need of nursing home care, that is the real sleeper issue of this election. In the very likely event that a President Romney refused to follow through on politically toxic Medicaid cuts that would leave voters and Republican governors howling, he would either have to preside over a significant tax increase or allow debt levels to keep spiraling out of control.

Other affluent democracies pay for social programs through value-added taxes that are embedded in the cost of virtually all goods and services, a measure that Paul Ryan has seriously considered as a replacement for America’s jerry-built corporate income tax. It is safe to say that the president is not going to go down this road, at least not before November.

Obama has thus left himself with only one option for raising revenue. He will have to raise taxes on high earners to levels far higher than those that prevailed during the Clinton boom. The Obama White House has, for example, championed the idea of curbing tax deductions and credits for over-$250,000 households. Soaking the rich might be a cherished tradition in Democratic politics, but as effective marginal tax rates approach 50 percent, the impact on incentives would be brutal.

The irony is that President Obama might have been better off taking a page from Walter Mondale and forthrightly arguing that universal health coverage and high levels of public investment and a fairer society and a greener environment and everything else Democrats want from government are actually worth paying for – not just by the top 2 percent of the top 1 percent, but by the top 50 percent. The only real alternatives are rolling back the growth of government, Ryan-style, or accepting sluggish growth for years to come.

PHOTO: Minnesota Democratic senatorial candidate and former Democratic presidential nominee Walter Mondale smiles at a student’s question at a town meeting at Macalaster College in St. Paul, Minnesota, October 31, 2002. REUTERS/Stringer

Good article. Illustrates very well the problem of both parties. Democrats cannot move an inch on entitlements because if they do, their current coalition will fall apart. They had been losing the white working and middle classed for years, due to cultural issues. They have no room to manuever. Republicans, on the other hand cannot move an inch on taxes because if they do, their coalition will fall apart. They had convinced middle class voters that low taxes is good in all circumstances so they have no room to manuever either.

The only way to reduce this stalemate is for one of the parties to break open and create a real majority coalition. Neither party can do this in this election. Obama could have done it if he pursued health reform differently but he chose not to. Now backed himself into a corner. Romney could have done it if he put out a credible tax reform plan – that would show that Republicans can compromise on taxes and even raise them if necessary. But he chose not to.

A politician like Chris Christie or Marco Rubio could create a majority coalition. On the Democratic side, that politician would be Hillary Clinton. On to 2016?

It doesn’t take a rocket scientist to see that funding existing entitlements required more money than America has to spend. The “proof is that increases to America’s debt “limit” have become both routine and unavoidable. We just print that which we do not have. The Weimar Republic went down that path in the early twentieth century, and educated people ate rats just to survive.

Only those with their head in the sand can truly believe that continuing “growth” of our bloated, inefficient government is sustainable. Democrats would take our “ship of state” full speed ahead in blind and futile pursuit of “…universal health coverage and high levels of public investment and a fairer society and a greener environment and everything else Democrats want from government” just like the Titanic; igoring economic threats that, like icebergs, can send our economy into a one-way trip to the bottom.

Only “…rolling back the growth of government, Ryan-style, AND taking an ax to the fiscal black hole that is Medicaid will buy America the time necessary to survive. We must endure and prevail over an inevitable economic sluggishness if a sustainable “new normal” for an “information age” is to emerge to be harnessed.

With an exploding population of over SEVEN BILLION people, our world faces a radically different future with which economists are without experience. Henceforth “opportunity through growth” is but a mirage. Every new mouth heralds ever decreasing prosperity for most of the world’s population. The way forward is unknown and unlit, and pitfalls surely await the impatient and unwary.

Invoking Walter Mondale seems kind of hyperbolic, in all honest. The Democrats are doing an alright job at how narrative is working this election, and it appears to be the job of Reuters and the Associated Press to run articles that are about as cynical and dismissive as you can get regarding the President’s changes of re-election.

Your argument keeps going in circles and makes little sense. I’m pretty sure Obama and his team can decide on their own message without some wanna-be conservative giving cues. I appreciate your desire to be fair as a conservative, and I don’t feel insanity in your words, but your piece has no value other than to bring up ghosts of the past that have no bearing on the premises. Yawn!

The only real alternatives are cut defense by 50% and eliminate tax breaks for fossil energy. The only real alternatives are federal taxes on SUVs and pickup trucks. The only real alternative is a federal luxury tax on boats and diamonds. You see, your only real alternatives are not my only real alternatives.

How on earth would the “effective marginal tax rate” come anywhere near 50%?

If ALL deductions were eliminated for those falling into the top tax bracket under the so-called Clinton rates the ‘effective marginal tax rate’ could never exceed 39%, high to be sure, but not even close to 50%. And while that rate was being paid, we saw the largest peacetime economic expansion in modern history. The 1990s were so good, Republicans can’t stop talking about it.

As for entitlement cuts, even a casual follower of reporting on budget negotiations over the last years knows that the Obama White House has in fact agreed to discuss entitlement cuts if Republicans will discuss taxes.

Finally, you might have heard from both Romney and Ryan that the Obama Medicare plan makes cuts in Medicare. The same cuts embraced by Romney and Ryan.

No one, including Obama is proposing a 50% marginal rate, but between 1940 and 1981, we had marginal rates that far exceeded 50% and I don’t recall a lot of people going Galt. Why would 50% constitute such a brutal disincentive?